A retail business needs to manage its supply chain of products. In one aspect, computer applications are used to manage inventory of products and determine demand forecasts. In the retail industry, a replenishment process is followed to decide how much product to order and when to order product to ensure that there is enough inventory in store to satisfy customer demand.
Normally, the current inventory level for a product or item is compared against some defined threshold level of inventory. If the current level of the inventory is less than the threshold level, an order will be placed. The level to which the inventory is to be increased by placing an order may be defined as well. The amount of product to be ordered (the order quantity) is simply the difference between the level to which the inventory is to be increased and the threshold level of inventory.
Defining values for the threshold level and the level to which the inventory is to be increased is too often an unreliable and inaccurate guessing game. Many times, the values are simply set to some fixed values which are used over and over again for each replenishment cycle. The fixed values may work well enough for some replenishment cycles, but may not work well at all for others. Good values should result in minimizing on-hand inventory while also preventing out of stock situations.